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AFM 291 > Week 5 > Flashcards

Week 5 Flashcards

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1
Q

What is periodicity?

A

Its when a a business make or report their financial performance over a fixed period of time

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2
Q

What is the usual time frame for peridocity?

A

Every 12 months

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3
Q

Does the period need ti be Jan 1 - dec 31

A

No it does not need to match the calendar year

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4
Q

What does cut-off mean?

A

CUt off refers to the a specific point in time when one reporting period ends and the next one begins

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5
Q

Why is it important for companies to have a cut-off period?

A

Its the concept that in accural accounting not evrythig is paid or recieved right so we need rules that state:

1) Which transactions belong to the current period (before cut-off)

2) Which should be recorded in the next period (after cut-off).

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6
Q

What is subsequent events?

A
  • It’s the time after the cut-off date (year-end) before the company officially approves its financial statements.
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7
Q

What id soemthing happen happens in the subsequent events section?

A
  • If something important happens during this period that affects assets or liabilities as they existed at year-end, it might need to be included in the statements.
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8
Q

What can subsequent events also be called?

A

IFRS calls this: “events after the reporting period.”

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9
Q

How do we know if somehting happens after the year-end to include in this year’s financial statements? - needs to be memorized

A
  1. Recognition = Should it be included at all?

Ask: Did the event or transaction happen before year-end?

✅ If yes → include (recognize) it.

❌ If no → don’t recognize it.

🟨 2. Measurement = What number should we put on something we are including?

Ask: Is there newer information that helps us value it more accurately?

✅ If yes → use it (even if the info came after year-end).

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10
Q

What if soemthing happens during the subsequent period

A

The financial statements for this period won’t change
* Instead, if it’s a significant (material) change, the company will disclose it in the notes to the financial statements, informing users of the financial statements about the event.

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11
Q

What are the three types of accounting changes?

A

Changes in accounting policy
Changes in accounting estimates
Accounting errors

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12
Q

What does changes in estimates mean?

A

Happens when the company updates a estimate based on new info or experience.

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13
Q

What are Changes in accounting polciies?

A

Happens when a company switches from one accounting method to another.

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14
Q

What are acccoutnign errors?

A

Sometimes, people make mistakes—like forgetting to record something or using the wrong numbers.

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15
Q

What is an error?

A

An error happens when a company reports the wrong number on its financial statements even when it had the correct information at the time

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16
Q

What else is important when recongizing an error?

A

We cannot use the concept of hindsight?

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17
Q

What is hindsight?

A

Hindsight is looking back at something after it has already happened and using new knowledge to judge past decisions.

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18
Q

In accounting are you allowed to use hindsight?

A

NAUR

In accounting, you are not allowed to use hindsight to say something was an error.

You must judge past decisions based only on the information that was available at the time.

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19
Q

Is It an Error or Not?

In 2022, a company estimates a machine will last 5 years.

By 2024, they realize it will only last 3 years.

A

Explain: The original 5-year estimate was made in good faith using the info available at the time. New info just became available later.

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20
Q

How to correct an error?

A

The company must do a retrospective adjustment

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21
Q

What is a retrospective adjutsment?

A
  1. Correct the mistake in the current records
  2. Restate (Correct) any past financial statements that are being shown for comparison (like last year’s income statement or balance sheet)
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22
Q

What is a change in accounting policy mean?

A
  • Its when a company switches from one acceptable accounting method to another by choice
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23
Q

How does a compnay need to treat the accounting policy change?

A

It must use a retrosepctive adjusment with restatement

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24
Q

What is a retrospective adjustment with restatement mean?

A
  1. The company must go back and recalculate past years’ financials using the new method
  2. It must restate (correct and update) those past numbers so users can compare old and new years properly
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25
What is a change in accounting estimates?
A change in estimate when a company updates things such as: 1) The useful life of equipment 2) The percentage of bad debts 3) Any other value that’s based on judgment and not exact
26
Why does a company change its estimates?
* These changes are made due to new information that is available at the time of financial statement preparation and this new information makes the old estimate less accurate
27
How does a compnay need to treat the accounting estimate change?
* We use a prospective adjustment
28
What is a prospective agreement?
That means: a. Do not change past financial statements b. Only apply the new estimate in the current and future years So it’s forward-looking — based on the new info.
29
How do you know if a change is a policy, estimate, or error?
Step 1: Ask — Is the change just a choice or based on new info? If it’s management’s choice (e.g., changing depreciation method): → 🟦 Change in policy → 🛠️ Retrospective with restatement If it’s based on new or updated info, go to Step 2. Step 2: Ask — When was the new info available or knowable? If the info was known or should have been known earlier: → ❌ Error → 🛠️ Retrospective with restatement If the info only became available now (wasn’t knowable before): → 🔄 Change in estimate → 🔮 Prospective treatment
30
What is cash accounting?
Only records cash when it's actually received or paid. * Example: If you do work in December but get paid in January, it’s recorded in January. * Main financial report = Cash Flow Statement → This shows how much cash came in and out during the period.
31
What is accural accounting?
* Records income when earned and expenses when incurred, not just when cash moves. * More detailed and gives a better picture of performance.
32
What are the main four financial statements under accural accounting?
1) Statement of Comprehensive Income 2) Balance sheet 3) Cash flow statement 4) Statement of changes in equity
33
What is the statement of comphrehensive income?
○ Shows how much profit or loss the business made over a period (not just cash).
34
What is the balance sheet?
○ Shows what the company owns (assets) and owes (liabilities) at a point in time. Also shows owners’ equity (what belongs to shareholders).
35
What is the cash flow statement
○ Still included to show where the cash is coming from and going.
36
What is the Statement of Changes in Equity?
○ Shows how equity (ownership value) has changed over time.
37
What are financial statements?
* Financial statements are the final result of the accouting process * Their main purpose is to provide useful information to the users such as * Investors, lenders and other decision-makers
38
What does IFRS say financial statements should provide?
1) information on the entity’s resources and claims against those resources 2) information on changes in the entity’s resources and claims.
39
What are resources?
* Resources are what the company owns
40
What are claims?
* Claims = what the company owes, including: ○ Lenders (liabilities like loans) ○ Owners/shareholders (equity) So, resources and claims together explain the company’s financial position — what it has and who has a right to it.
41
What are the three things that change in resources and claims?
1️⃣ Profit or Loss (Accrual accounting) Did the company earn income or have a loss, no matter when the cash was received? 2️⃣ Cash Flows (Cash accounting) What were the actual cash inflows and outflows? 3️⃣ Other Changes (Not from performance) Examples: Issuing shares, paying dividends, revaluing assets, etc.
42
What does articulation mean?
Its the connection between the financial statements as they work together and flow into one another.
43
Which of the four financial statements is the core financial statement?
BS
44
Why is the balance sheet the core of the financial statement system?
Because our accounting system is based on double-entry — every transaction affects two or more accounts.
45
What are the three tyes of trasnactions that can affect the balance sheet
exchange of one asset for another; exchange of one financial claim (i.e., a liability or equity) for another; or increase (or decrease) of an asset and a financial claim.
46
What is the balance sheet
Its the financial postion of a company at a point in time
47
What questions does the b/s answer?
What the company owns (assets) What the comapny owes - liabiltiies and euity
48
How should a b/s be organized due to IFRS standards?
This balance sheet uses the current/non-current format, which is required by IFRS unless another method (like by liquidity) would be more helpful.
49
What is current items
Current (short-term) assets and liabilities (used or settled within 12 months)
50
What are non current items?
Non-current (long-term) assets and liabilities (used or settled after 12 months)
51
What qualifies as an asset on the balance sheet?
To be shown as an asset, something must: Be a resource the company controls because of a past event Be expected to provide future economic benefits Have a reasonably reliable value Be probable (likely) to bring in future benefits
52
What is a liability?
A liability is: * A present obligation (something the company must pay or do) * Caused by a past event * And it will likely lead to an outflow of resources (like cash) If it’s likely to be paid and can be reasonably measured, it goes on the balance sheet.
53
How do we know if a liability is current?
It will be paid in the normal business cycle (e.g., within months) It’s for trading purposes (like short-term debt) It is due within 12 months The company cannot delay payment for more than 12 months Everything else is non-current.
54
What is equity?
It’s what belongs to the owners of the business after all debts are paid.
55
What are some common components of equity?
Contributed capital – money the owners/investors put in Retained earnings – profits the company has kept over time Reserves – adjustments like revaluation of land (covered in Chapter 10) Non-controlling interest – ownership held by others in subsidiaries
56
What is the comprehensive income?
Its a financial report that shows how much the company earned or lost during a period.
57
What does the comprehensive income include?
Net Income (Profit or Loss) from normal operations Other Comprehensive Income (OCI) – gains/losses not included in profit, like revaluation gains or foreign exchange differences
58
How can a comprehensive income be presented?
One full statement of comprehensive income with all 7 line items Income Statement (items 1–5) Separate Statement of Comprehensive Income (items 6–7)
59
What are the two ways a compnay can report expenses?
1) Nature 2) Function
60
What does neature of an expense mean?
The source of the expense (depreciation from equipment, costs of employee labour, cost of raw materials
61
What does fucntion mean?
Function refers to the use to which the expense has been put (cost of sales, distribution, administration, or other activities). Needed to be done by IFRS
62
What is the statement of cash flow?
The Statement of Cash Flows shows how cash (and short-term cash-like investments) moved in and out of a company over a period — usually one year.
63
What are the three sections of a cash flow statement
Operating Investing Financing
64
What ar the oerpating activities?
Changes in current assets and liabilities resulting from day-to-day operations of the enterprise
65
What are examples of operating activities?
Cash received from customers Cash paid to suppliers Cash paid to employeesW
66
What are examples of investing activities?
Proceeds from sale of land Cash paid for purchase of equipment
67
What is investing activities?
Purchases and sales of non-current assets
68
What are financing activities?
Raising or repaying funds
69
What are examples of financing activites?
Proceeds from issuance of common shares Repayment of long-term debt
70
What are two ways of presenting oerating activities?
Direct method Indirect method
71
What is the direct method
Lists actual cash in and out Clearly shows who paid and who got paid Example: Cash received from customers = $50,000 Cash paid to suppliers = ($20,000)
72
What is the indirect method?
Starts with net income from the income statement Makes adjustments for: Non-cash items (like depreciation) Changes in current assets/liabilities
73
What are note disclosures?
Note disclosures are the extra explanations that go with the four main financial statements (balance sheet, income statement, cash flow, and equity statement).
74
What are “discontinued operations” and how are they shown under IFRS?
Discontinued operations are parts of the business that the company plans to sell or shut down. IFRS says they should be reported separately on the financial statements (e.g., a separate line on the income statement).
75
Why are comparative figures important, and what does IFRS require?
Comparative figures help users spot trends. IFRS requires companies to present prior-year numbers and update them if the current year’s presentation has changed, so users can compare consistently.

AFM 291 (6 decks)

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